So of course the pro forma meeting between President Obama and congressional leaders ended Friday without a deal, or even a new proposal. And why should it have? Obama, the Senate, and the House Republicans have made their positions abundantly clear. With about 78 hours left to go before Jan. 1, 2013, it seems that both sides prefer going over the cliff to compromising further (in the Democrats’ case) or compromising at all (in the Republicans’ case.) (In the Senate, Majority Leader Harry Reid and Minority Leader Mitch McConnell are continuing to discuss a potential deal.)
When news broke in the late afternoon that the White House was not going to make an offer for a small, cliff-avoiding deal, the Dow Jones Industrial Average, which had been trading down about 50 points all day, dropped an additional 100 points. The movement raises serious questions about the intelligence of people trading based on what they think will happen at these meetings. But the reaction—down about 1 percent—was also quite muted and lame. And that’s part of the reason there hasn’t been a deal yet. If people are hoping the markets and the private sector will push the public sector into a deal to avoid the economically damaging cliff, they’re going to have to wait a few more weeks. Too many entities in the private sector are either in denial about the situation, or are not yet feeling the pain.
Let’s start with denial. Earlier this week, I argued that Starbucks’ initiative to encourage bipartisanship by having baristas scrawl the words “come together” on coffee cups was likely to fail. Friday afternoon, I received an email from Marriott International CEO Arne Sorensen. “Leaders need to reach a balanced deal now, before we go off the fiscal cliff at year end, and without creating a new set of future conditions that recreate a new fiscal cliff in the future,” he noted.
Of course, there are a host of balanced plans out there. The White House keeps proposing them. The Senate has passed one. The two parties agreed on spending cuts of $1.5 trillion in 2011. But the House Republicans aren’t interested in a balanced plan because they believe taxes are already high enough. When House Speaker John Boehner presented them with the possibility of voting on a wildly unbalanced plan—one that preserved Bush tax cuts for everyone making $1 million or less—the rank and file told him to forget it.
Instead of distributing emails to journalists or making blog posts, CEOs who are really interested in a deal should get on the phone to Republican elected officials and ask, order, and beg them to make a deal that will effectively raise taxes on the CEOs. And CEOs are not nearly at that point of desperation.
Instead of one day with the Dow down 150 points, we will need several days in a row where the Dow is down several hundred points. That will cause CEOs’ net worth to fall sharply, making options worthless, and render corporations incapable of issuing new debt or stock, striking alliances, or doing deals. When traders walk into work feeling nauseous because futures are down so low, and when Grand Central Station at 4:30 p.m. looks like a casting call for one of those zombie television shows— half-dead creatures staggering around, their hair a mess, clothes ripped—that’s when private-sector pressure for a deal will really start to mount.
In the absence of a stock-market meltdown, it will take some serious erosion in the fundamentals of the U.S. economy to focus the minds of CEOs. And even then, some of America’s most influential honchos will continue to be oblivious. For many of America’s largest companies, the U.S. has become something of a rump market, accounting for 20 percent of total revenue. A falloff at home won’t affect them too much.
The first cries of pain will likely come from companies like Walmart, whose core customers will be hit hard by the rising payroll tax and the end of unemployment benefits for nearly 2 million people that will result from a cliff dive. Investors have already taken note. The company no longer releases monthly sales statistics. But by the end of January, if Walmart has racked up four straight weeks of negative year-over-year sales, you can bet CEO Mike Duke will pick up the phone and that Arkansas’ congressional delegation will find itself eager to make a deal.
In the absence of a stock market meltdown, it will take some serious erosion in the fundamentals of the U.S. economy to focus the minds of CEOs.
There’s actually a degree to which the underlying strength in the markets and the economy are working against a grand bargain. As we’ve documented repeatedly over the past year, housing is back, the labor market is healthier, and the rate of economic failure is down sharply. The economy is growing. Going over the cliff won’t instantly cause the housing market to fall, or push companies to lay off en masse, or instantly cause millions of Americans to stop paying their bills. Several weeks into the new year, the lethal cocktail of higher taxes and lower government spending will start to make executives feel woozy. Payment cycles will slow. Some highly leveraged companies may fail. But we won’t see the sort of wholesale failure that shocked Washington into action in the fall of 2008.
It’s going to take losses of at least 1,000 points on the Dow to really get the attention of House Republicans and their private-sector patrons.